Macquarie’s Storm payout ‘unfair’: court

An agreement by
Macquarie Bank
to pay nearly $30 million in extra compensation to a group of Storm Financial investors who paid for a law suit over the collapse was unfair, a court has decided.

In March, Macquarie agreed to pay $82.5 million to about 1050 investors. A substantial chunk – $28.9 million, or 35 per cent – was to go as an extra payment to the 317 investors who chipped in to fund the legal action, giving them about 42 per cent of claimed losses back plus costs.

The rest would recover just under 18 per cent of their losses.

The full bench of the Federal Court decided that was unfair on Monday in a joint judgment that is a win for the Australian Securities and Investments Commission, which brought the case, and could have implications for other class actions.

“There is no rational explanation for rewarding the funding group members by paying them a premium . . . by a method which does not mathematically correlate with the amount they paid to fund the litigation," Federal Court judges
Peter Jacobson
,
John Middleton
and
Michelle Gordon
said. “We do not consider the distribution of the settlement sum to be fair and reasonable to all group members."

Victims were not given an equal opportunity to share in the funders’ premium, the court found, making the payout unfair.

The law firm involved, Levitt Robinson, did not make it clear from the outset that those funding could get a premium. That happened two years later, in a December 2012 bulletin saying it was “fair to discriminate against those group members who were getting a ‘free ride’". A February 2013 bulletin addressed to all Storm victims warned “freeloaders" that funders would get a premium.

The court was particularly critical of the law firm for offering a small group of clients the opportunity to become funders for as little as $500, after the settlement was reached.

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“Why should those 13 Levitt Robinson clients be afforded that opportunity at the expense of the unrepresented group members?" the court queried.

“The answer is they should not.

“If there is an analogy, it is that a small number of group members (who were also clients of Levitt Robinson) were able to place a bet on a horse race after the race had run and knowing the result of the race."

The premium was also unfair because it was calculated by reference to success fees.

ASIC, Macquarie and the victims have until August 19 to submit orders to the court on a new agreement.

ASIC deputy chairman
Peter Kell
said compensation for funding litigation could be “perfectly reasonable", if the offer was set out in full for all participants at the outset, was proportionate to the funders’ costs and risks and was necessary. In the Macquarie settlement, only one of the victims –
Tracey Richards
, in whose name the 2010 case was brought – bore the risk of costs.

“We don’t want to discourage this sort of litigation funding, but the fairness of the distribution was something we felt we had to challenge," Mr Kell said. He declined to set out what was “fair and reasonable" .

ASIC is pursuing Storm founders
Emmanuel Cassimatis
and
Julie Cassimatis
and is awaiting a court verdict on its case against Macquarie for its part in the scheme.

The case is unusual for its reliance on funding from the victims, rather than a litigation funder.

John Walker
, of funder IMF Australia, said payments to all claimants should be aligned. It was hard to find someone willing to adopt the costs and risks of a legal action, he said.

Funders can generally get about 30 per cent of payouts, for taking the risk of an action.

“That’s why there is a market for third-party funding which is not going to be affected by this decision."

Jones Day law firm partner
John Emmerig
said the case had numerous implications, including the need to establish “good architecture" for terms at the outset of an action.

Despite acknowledging that its decision would “re-enliven an extraordinarily difficult class action rather than to give effect to a settlement reached after a mediation conducted by an eminent former judge", the court found that substantial injustice would in fact occur if it allowed the settlement to stand.

Giving some hope to litigation funders, the court held that its finding did not stop future class actions from being brought by a group who agreed “from the outset" to terms and conditions such as a premium for interest, at bank penalty interest rates, for the funds committed to the action.

“That is compensation for the time they stand out of their money and the risk involved.The court accepts that this form of litigation funding is an important alternative to commercial litigation funders and should, to the extent possible, be encouraged."